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Q. Impact of pruning exemptions in GST: As Exemption list to be pruned for Goods and Service Tax structure, hence it may push up inflation. Discuss.
Aug 11, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently both houses of Indian Parliament have passed 122nd constitutional amendment bill, which creates uniform Goods and Service Tax structure across the country.

Issue-


Currently about more than 500 items are in exemption list under state- VAT, Central excise and service tax. After passage of GST bill, finance ministry and empowered committee of state finance ministers drawing a common list of exempted items. It is expected that the list of exemption would drastically reduced under exemption list.

Its impact-

  • Currently more than 500 items are under exemption from central and state tax structure. The pruning of the exemption list may lead to several of these products becoming taxable. Hence prices of such commodities could increase at least for short run under the GST regime.
  • While manufacturers or service providers as well as resellers of such goods or services will start getting credit of taxes paid on capital goods, inputs and input services, a majority of which were non-creditable in the current regime. Hence consumers may need to pay more under new regime.

Suggestions-

  • In order to minimise inflationary impact, it is better to keep mass consumption articles on the exemption list under GST or at least at a very low band of say 4% to 6% under GST.
  • Instead of drastically reducing exemption list, it is better to bring down central list of exemption, which is quite long. It would be brought to the level of the states’ list, which is much narrower.

Conclusion-

Under GST, total exemption list might have less than 100 items, hence at least for short run it is expected little inflation on such items.  Hence to contain inflationary impact governments needs to keep basic items under exemption list for some time.


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